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Interview

with Luis Gonzales, Director General of Hydrocarbons, Directorate General of Hydrocarbons of Peru

23.02.2011 / Energyboardroom

You were nominated the head of Peru’s DGH six months ago with the main task of promote Peru’s hydrocarbon sector after a period when a lot was already done, such as LNG terminals, major oil and gas discoveries, and new major investments coming in. With so much previously done, what do you consider to be your main objectives and goals now that you are the head of the DGH?

The main objective is to continue to promote both private and public investments in Peru’s hydrocarbon’s industry, especially through public-private partnerships (PPP) in order to consolidate all current investments and to improve the stability of rules regulating the sector in such a way that investments that are already in place have a secured return. In the end of the day, the only way to continue attracting very-needed investments into Peru.

For instance, in natural gas – where Peru has been very successful – the countries that are actually incrementing their reserves, such as Brazil and Colombia, are the ones who have stable and clear rules. They are not the ones who follow other models that have scared away public and private investments, depleting their reserves. The logic is simple, to increase reserves you need major investments, and for investments you need to have big markets where you can secure the return of investments.

The Camisea project is a great example of the safe returns Peru offers. When its infrastructure was built, the incrementation of demand had a timeframe of ten years. However, we have reached the initial transportation volume target in only six years. This is why one of our main objectives now is to increase the transport capacity both of natural gas and liquids from those fields.

With an economy growing much above 6% and expected to keep on this track, how is Peru acting to guarantee the energy sufficiency it needs to fuel this growth and how are these efforts reflected in the increase of reserves and production?

In upstream Perupetro has already offered around 15 blocks for bidding in 2010 (25 blocks were offered, of which 10 will be bid again this year). This surely makes Peru more visible on the international upstream business arena. Hopefully, before the second semester of 2011 these ten remaining blocks will be bid, since they have an easier bidding process. This is very important to keep the interest of investors for new opportunities alive and constant. If you stop it, it is harder to maintain the interest of investors alive.

Peru has already under development the lot 64, carried out by Talisman, who has successfully found light oil. We believe this lot will be already producing around 2012-13. Another promising lot that is being postponed due to infrastructure needs is the lot 67 of Perenco. This lot is expected to produce up to 100 thousand bpd. Peru is currently producing around 70 to 75 thousand bpd, plus the liquid gas production, which is around 85 thousand bpd. Hence, the country is currently around 150 thousands bpd equivalent. Besides that, Peru is producing around 1 billion cubic feet per day of natural gas, which is around 166 thousand bpd equivalent. Therefore, in total, Peru is producing around 316 thousand bpd equivalent per year.

We also have the lot 39 operated by Repsol, aligned with Burlington (Conocophillips), where three wells were drilled and have found light oil, with good prospects for much more. One of the main objectives of Peru, as all countries, is to have energy self-sufficiency, especially now at times of such high volatilities. The national demand is getting close to 200 bpd – right now Peru is consuming around 186 thousand bpd of national demand for refineries – which are basically Petroperu and Repsol, with around 50% share of the national market each. I’m confident we can reach this demand in a few years with the current speed of discoveries.

Regarding natural gas, Peru has the lots 88 and 56 from Pluspetrol, where the reserves are around 8.7 tcf and the 2.5 tcf respectively. The lots 57 and 58 from Repsol and Petrobras are estimated to have 2 tcf and 1.7 tcf respectively. Peru’s total reserves should reach around 14.9 tcf, but obviously the potential is much higher. The exploratory risks in these zones are decreasing sharply and this is a major magnet for new investments.

Latin American markets are generally known by the volatility of its legal framework, especially in what’s related to taxation: royalties, Production Sharing Agreements and so on. How investor-friendly is the Peruvian taxation model towards national and international oil and gas private investors?

The rules in Peru are the same for public & private, national & international investors. One of the major pillars of Peru’s current success is its two-decades-old record of respect for contracts with private investors. We have established juridical security agreements in contracts, which are backed by international institutions where investors can recur in case of need. This brings a much needed safety to investors and I am sure this will continue. Even in an election year, all candidates that are leading the pools maintain the same formula of conducting the economy through a stable and investors-friendly way, securing investments that already are in Peru and trying to attract even more.

The royalties level is defined in the bidding rounds, the companies that offer the best economic and technical deal get the exploration awards. In the last bidding round the royalties have reached their record, bringing major benefits to Peru – the smaller the risks and the biggest the geological prospectivity of our fields, Peru will gain bigger benefits out of the upcoming investments.

Peru has reformed the national distribution of royalties transferring more resources to producing areas. How does the DGH help these regions better use these resources?

The work ahead is to further support these decentralized entities so we can promote the development that normally gets concentrated in the capitals, avoiding social conflicts. The only way to avoid such conflicts is to bring development to the communities involved in the projects.
The DGH is closely collaborating with projects such as the LPG terminal being built in the outskirts of Cusco city and we are supporting the construction of the South Andean Pipeline, done by Kuntur, a gas pipeline that will cross all the south area of Peru, promoting the social and economic development of the entire country. We expect that in 2015, in each of the cities that this gas pipeline crosses, it will promote the economic development of such communities.

A decentralized revenues model was implemented in 2004. Now we have learned from previous mistakes and the presidential candidates are much better prepared to develop projects and infrastructure that have a better benefit to society such as hospitals, educational centers, roads, electrification, and a vast array of projects that can promote the quality of life of the population. Not to mention that all these infrastructure projects generate revenues, jobs and are very profitable for both investors and the country.

Some investors were scared by the posible revision of the export agreements of Camisea Gas Project. What measures is the Peruvian Government taking in order to guarantee the respect of the contracts signed?

Nothing has been changed from the initial agreement. As it is, it authorizes the exports of gas – after all, this is why Melchorita LNG Plant was built in a $4 billion investment. It also stated that if, for any emergency, the national market lacked natural gas, it would be prioritized over exports and prices would be tagged to those exported.

Naturally we cannot think that there is a fuel’s shortage of the national market while we export. But beyond that, our strategy is to find bigger reserves and improve the existing infrastructure in a way that both the national market and our international clients can be satisfied in their energy demands.

What will be Peru’s next government main challenge in the hydrocarbon sector?

Improve Peru’s hydrocarbon supply chain management or what is now called connectivity. Chile, for instance, has a major infrastructure network to receive gas. Peru’s development challenges are the same, to develop the necessary infrastructure such as the pipelines I’ve mentioned, to improve all infrastructures to receive and export gas, growing our storage capacity. Peru is also investing $1.5 billion in refineries to improve the quality of products. Each day the environmental standards are higher, hence new investments have to be made in this front. The country is now preparing itself, the projects are underway, and most of them have already overcome the main challenges Peru faced up until recently. Now we have to continue with these projects, making sure there are no steps backwards.

In terms of new projects, we have for instance a project of building a pipeline from Pisco, where the liquid fuels will arrive from the fields in Southern Peru, and take it through a pipeline to Lima, bringing a large amount of LPG and avoid problems such as the ones occurred in July last year when, due to sudden problems such as high tides, we couldn’t get the LPG in the port. The pipeline would be very easy to install and the returns to the investment quite big. All these projects must be executed; all the right conditions are in place. This government has worked really hard to push Peru forward and I am sure these policies will be continued in the next ones thanks to their positive results.

What’s your final message to the readers of the Oil and Gas Financial Journal who are searching for investment opportunities in Peru?

One of DGH’s major objectives is to attract foreign investment to Peru’s fast-growing hydrocarbon industry. The Directorate has open doors to all of you willing to get better informed about the opportunities and investment procedures in Peru. We are a house with a lot of professionalism, caring all our projects inside a well-established legal framework with transparency and in such a way that investors can have the certainty that they are investing in a serious country, where their profits also mean Peru’s development.

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